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There was another negative close on Wall Street last night and a second consecutive triple-point loss for the Dow Jones Industrials. Nevertheless, all the US majors rallied off their intra-day lows and the NASDAQ Composite even managed to eke out a small gain. This recovery has contributed to a firmer open across European bourses this morning while FX markets are relatively subdued. The euro is generally firmer although currently unchanged against the US dollar.

China remains on holiday for the New Year, yet overnight brought the release of Manufacturing and Non-Manufacturing PMIs. These were both a touch firmer than expected and the USDCNY was little-changed overnight.

Investors remain on guard following some recent surprises from the Trump administration. First off, they were rattled by President Trump’s selective travel and immigration ban - an executive order which he signed on Friday. But yesterday the head of Trump’s National Trade Council, Peter Navarro, said that Germany is exploiting her EU partners and the US by using a “grossly undervalued” euro. The market’s concern is that by expressing these views so brazenly, the Trump administration is demonstrating that it will focus on the dollar’s exchange rate as it looks to make new trade deals. President Trump, together with Steven Mnuchin, his nominee for Treasury Secretary, have both made it clear they would prefer a weaker dollar. But it’s also an unfair attack on Germany which has been pushing against the ECB’s loose monetary policy for years now. Why does the Trump administration want to pick a fight with its best ally within the Euro zone?

Later this evening the Fed concludes its first monetary policy meeting since December when it hiked rates for only the second time in 10 years. There’s no expectation of a rate rise today, but investors will parse the accompanying statement for clues over future tightening. The CME’s FedWatch tool assigns a 20% probability of a 25 basis point rate hike in March.

Stock Index Update

· Another negative close on Wall Street

· Trump Administration causing concern

Yesterday brought more losses across European and US equities although some indices held up better than others. The UK’s FTSE100 closed slightly lower on the day while the German DAX was down over 1.2%. Yesterday brought the release of some decent economic numbers from across the Euro zone. Economic growth was up 1.7% in 2016, while the unemployment rate fell to 9.6%, the lowest figure since May 2009. Inflation picked up to 1.8% and is now approaching the ECB's 2% target. All-in-all, the numbers were better-than-expected.

However, as the European close approached it was the US indices which were coming under selling pressure and weighing on stocks generally. The pharmaceutical sector was particularly badly affected after President Trump described drug prices as “astronomical” during a scheduled meeting with drug company executives. The Dow was down over 150 points at one stage, while the S&P broke back below a mild area of support around 2,270. The next significant support level comes in around 2,240.

Investors are still concerned about President Trump’s travel and immigration ban, and perhaps more importantly, the public reaction to it. Market participants were apparently thrown not just by the immediate fall-out of the decision but also the speed with which such a major headline-grabbing piece of policy was implemented. There was no spin doctoring, just the sudden announcement. There’s now the fear that there could be more of this type of policy-making which could have significant market implications. This is particularly the case when considering the possible imposition of trade tariffs and President Trump’s potential to upset other world leaders.

Commodities Update

· WTI and Brent bounce on OPEC cuts

· Precious metals rally as dollar retreats

Crude oil fell in early trade yesterday in a continuation of Monday’s general market sell-off. But both WTI and Brent recovered as the session progressed. Analysts put this turnaround down to the news that OPEC production fell by over 1miilion barrels per day (bpd) in January. This represented a compliance rate of 82% when looking at promised output cuts which was much better than many expected. This was also a considerable improvement on the 60% compliance achieved on quota agreements back in 2009. It is also quite close to the 1.2 million bpd OPEC target, although we’ll have to wait to see if non-OPEC countries are coming through with their promises to reduce output by 600,000 bpd.

Meanwhile US shale oil production is on the rise, contributing to a 6.3% increase in overall US production since last summer. The oil and gas rig count continues to rise with services provider Baker Hughes reporting that the number of active rigs is now at its highest level since November 2015.

Both gold and silver rallied sharply again yesterday. The trigger for the move was comments from President Trump’s top trade advisor, Peter Navarro, who said that Germany was exploiting the US and her EU partners by using a “grossly undervalued” euro. Mr Navarro went on to say that the multilateral Transatlantic Trade and Investment Partnership was dead, with Germany being a major hurdle to an US/EU deal. The news led to a sharp sell-off in the US dollar and a rush back into the safe havens of gold and silver.

Forex Update

· Trump aide attacks Germany

· Dollar Index back below 100

The dollar had another bad day yesterday, losing ground against all the majors. Investors rushed to trim their exposure to the greenback following comments from Peter Navarro who heads up President Trump’s new National Trade Council. Mr Navarro said that Germany is exploiting her EU partners and the US by using a “grossly undervalued” euro. In an interview with the Financial Times Mr Navarro said the euro was like an “implicit Deutsche Mark” which, because of its relative cheapness gave Germany an advantage over its main partners. The market’s concern is that by expressing these views so brazenly, the Trump administration is demonstrating that it will focus on the dollar’s exchange rate as it looks to make new trade deals. President Trump, together with Steven Mnuchin, his nominee for Treasury Secretary, have both made it clear they would prefer a weaker dollar. But it’s also an unfair attack on Germany which has been pushing against the ECB’s loose monetary policy for years now. The big question is why the Trump administration would want to pick a fight with its best ally within the Euro zone?

At the beginning of this year the Dollar Index hit a 14-year high of 103.80 after smashing through resistance around 100 soon after Trump’s surprise election victory. But a stronger dollar crimps US exports and makes it more difficult for the country’s multinationals to prosper overseas.

The Fed concludes a two-day meeting this evening. This is the first meeting of 2017 and also the first since the FOMC raised rates for only the second time in 10 years back in December.

Upcoming events

Today’s significant economic data releases and events include Manufacturing PMIs from Spain, Switzerland, Italy, France, Germany, the Euro zone and UK. From the US we have the ADP Non-Farm Employment Change, ISM Manufacturing PMI, Construction Spending, Crude Oil Inventories and Total Vehicle Sales. We also have the first FOMC meeting and statement of 2017.

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